It is
amazing how your economic editorialist can go all these years and still not
have a clue about capital gains taxation. Your editorial this morning, urging
"No Change in Capital Gains," could have been written 10 years ago, with the
writer then slamming the door to his mind on all arguments. Forget my
arguments, which you have been getting for as long as we have known each
other. Focus on the arguments of Alan Greenspan. Take on his public advocacy
of the elimination of the capgains tax, instead of the straw man you set up
today. I repeat for the hundredth time, the greatest beneficiaries of a low-
or no- capital gains tax are the people at the bottom of the socio-economic
pyramid, who have no capital and no access to capital. The people who benefit
least are those at the top, who have the capital and refuse to invest it in
those at the bottom because the capital gains tax is confiscatory.

Your
writer says: "If Congress cuts the tax in half, the after-tax profit on
typical investments is likely to rise by no more than 7 percent. That is too
little benefit to generate a substantial increase in saving and investment. As
a fraction of national output, the additional investment would be minuscule,
much less than 1 percent."

Where did this come from? The tax on capital
gains applies only to successful investments, which in almost all cases take
years to ripen. The only way to get a capital gain is to put at risk after-tax
income that derives from the sweat of your brow, physically or mentally. The
investment is in the effort of other people, physical or mental. Most such
investments fail in the first five years of trying, which means if you are
going to attract capital into high-risk initiatives (in the extreme,
inner-city blacks), you cannot confiscate the rewards when they appear. The
28% current rate becomes confiscatory after several years of compounding at
the annual T-bill rate. Your editorial is based on a fear that someone will
get rich by making the right investment. By blocking that investment, you keep
poor those who are trying to get rich. A cut in the capital gains tax to 14%
from 28% will have enormously beneficial effects at the margin, because the
payoff to successful investment will double.

Why do you think real
wages have been falling for the last 30 years? When taxes on labor are cut and
protected against inflation and taxes on capital are raised and left
unprotected against inflation, there is more labor in the mix and less
capital. The national living standard declines. The poorest people are shoved
underground into a life of crime and social pathologies.

The reason
your editorialist doesn't see this is because he was trained in a
demand-model, where investment is a given. "Demand creates its own supply."
This is why I have been urging you for years to find other work for the Ph.D.
economist who writes your editorials. Hire someone who knows less about
economics and something about finance — but someone who is at least willing to
ask questions. As it is, your economic editorials are caught in a time warp.
They can never get any better if questions are not asked of people, like
Greenspan, who have answers.